Growth is not enough for Mozambique’s informal workers

Sam Jones, guest blogger, is Associate Professor at the University of Copenhagen.

Economic performance in Mozambique had been nothing short of stellar over the past two decades. From 1994, average real incomes have more than doubled (to around $1000 per capita, in 2011 PPP terms), inflation has fallen to single digits, and the country has attracted significant inflows of foreign investment. Yet despite this progress, there have been persistent concerns that growth is not having a transformative impact on well-being. Worries over Mozambique’s developmental trajectory have gained international attention  over the last 12 months. Foreign investment has come to a halt, growth has slowed, the currency has lost value, and the ugly outlines of a debt crises have emerged. These suggest that Mozambique’s most recent phase of growth was built on shaky foundations, without deep roots into the broader domestic economy.
 
The lack of structural transformation in the economy is reflected in the structure of employment. The vast majority of households continue to rely on informal, smallholder agriculture. While service sector employment has grown over the past decades, this has been driven primarily by informal commerce, rather than activities that add significant economic value. Indeed, by any reasonable definition, at least half of the population remains absolutely poor.
This blog post considers whether the informal sector merits special attention; and, if so, what kind of policy stance is recommended.
 
Dynamics
Getting a handle on how Mozambique’s employment structure may be changing is not easy. As in many other low income countries, comprehensive labour force statistics must be taken from nationally-representative surveys, not official administrative data. These surveys are infrequent – the most recent published data for Mozambique is the 2008/09 household budget survey. A new household budget survey has just been completed, but only preliminary numbers are available. Even so, Figure 1 puts together the available series. It shows that (smallholder) agriculture continues to be the dominant primary income source for most Mozambican households. At the same time, there appears to be a shift out of agriculture and into services, which is gathering pace.
 

A declining share of agriculture in employment is often taken as a sign of positive structural transformation. If so, this would substantiate a view that growth is (belatedly) trickling-down to yield more widespread improvements. Regrettably, this conclusion is not entirely justified. A decomposition of changes in labour productivity reveals that, although recent growth has been supported by a movement of labour between sectors, this is not being accompanied by within-sector productivity growth. Average productivity in the service sector actually appears to be falling – i.e., on average, each new worker in the services sector has lower productivity than the existing workers she is joining. As found elsewhere in the region, this indicates that most of these new service sector workers are joining the (urban) informal sector, which may be becoming saturated.
 
Dividends to formality
The decomposition findings accord with other research. Together with Finn Tarp ( ADR, 2015), we investigated whether there is a specific dividend to working in the formal sector (having a job that pays a regular wage) in Mozambique. The basic answer is no – differences in income between different jobs appear to be driven by the economic sector of activity, not the degree of formality. The fundamental issue is the low productivity of the agricultural sector, from which shifting to an informal service sector job is often a step-up.
 
In this sense, it is not very helpful to frame the jobs challenge as one of promoting less informality (or more formality). The challenge is to raise productivity in activities that are (largely) informal. If this is not achieved, then the sustainability of Mozambique’s growth path is in doubt.
 
Demography
The size of this challenge cannot be understated. Reflecting the persistence of high fertility rates, demographic projections indicate that Mozambique’s labour force should double in size by 2050. Assuming that dependency ratios also decline, there is certainly scope for a demographic dividend to be captured. Even so, the majority of new jobs will need to be created in the informal sector. This is illustrated in Figure 2, which estimates the absolute and relative size of the informal sector (i.e., principally agriculture) under alternative hypothetical annual rates of growth for the number of formal employment positions in the economy. The assumption is that the informal sector will absorb all residual new entrants to the labour market.
 

 
To date, formal sector employment has grown at less than 5% per year and appears to be slowing, which is consistent with a stagnant relative size of the formal sector in total employment. If these historically-observed rates of growth continue, then the informal sector will grow rapidly in absolute terms. Even under an optimistic scenario, equal to 8% sustained annual growth rate in formal employment, the number of informal sector jobs are expected to grow in absolute terms for another 20 years.
 
Summary
What does this all mean? The main message is that the concept of formality is not intrinsically critical, at least for Mozambique. Rather, it is the stark differences in productivity between job types and sectors that are much more fundamental. Indeed, even if the formal sector grows rapidly for many years, a large proportion of Mozambicans will earn a living by other means for at least the next generation. In this sense, productivity growth that predominantly benefits the formal sector – e.g., through capital deepening or a focus on the mining sector – is unlikely to have a transformative impact on poverty. Raising agricultural productivity is indispensable.